China is often blamed as one of the primary avenues of physical piracy by the US entertainment industry. Of particular concern is movie piracy, which according to the MPAA (Motion Picture Association of America) costs the US film industry over 2.3 billion dollars in lost revenue per year.

The entertainment industry and the US government have been trying to convince the Chinese leadership to take a tougher stance against piracy. It's been alleged that piracy is so pervasive and common in China that customers only have to walk to a local street vendor to find the latest releases. Pirated goods are often dirt cheap, leaving the consumer with little incentive to go elsewhere for the product.

However "going elsewhere" is in fact a large part of the problem. Because of import restrictions on US entertainment such as movies, books and music, Chinese citizens have few alternative means to obtain US media. This compounds the problem, as the lack of a legitimate supply leads to a super-inflated demand for pirated work.

So it's not so much that China hasn't done enough to curb piracy. The RIAA and MPAA - as well as the US government - recognize that the Chinese leadership has taken many positive steps to reduce and target piracy. For example, the threshold that constitutes criminal piracy was recently halved. However the barriers to US imports still remain.

That sticky situation led to yesterday's news, when the US Trade Representative announced it was filing a complaint against China to the WTO (World Trade Organization). The complaint is divided into two parts, the "unacceptably" high rates of piracy, and perhaps more importantly, the continued barriers against US entertainment (books, movies, music, software, etc).

"Piracy and counterfeiting levels in China remain unacceptably high,” U.S. Trade Representative Susan C. Schwabb said. “Inadequate protection of intellectual property rights in China costs U.S. firms and workers billions of dollars each year, and in the case of many products, it also poses a serious risk of harm to consumers in China, the United States and around the world..."

Representative Schwabb continued, "In the same vein, we have discussed with China in detail the harm to U.S. industries, authors and artists who produce books, journals, movies, videos, and music caused by limiting the importation of these products to Chinese state-owned entities, and the problems caused by Chinese laws that hobble the distribution of foreign home entertainment products and publications within China. These products are favorite targets for IPR pirates, and the legal obstacles standing between these legitimate products and the consumers in China give IPR pirates the upper hand in the Chinese market.”

The MPAA and RIAA, who represent an overwhelming majority of US entertainment, have the most to gain - and lose - with this situation. Because of the rampant piracy in China, it's clear beyond any doubt there is a monolithic demand for US entertainment. The MPAA says there's over 2.3 billion dollars in losses every year - that's serious change. If the MPAA could market their goods in China and expose even a small fraction of the current piracy customers to legitimate material, their fortunes would slowly but surely begin to turn. Although the RIAA's losses due to piracy are smaller, they too stand to gain substantially if China opens their markets to American goods.

Not surprisingly, both the MPAA and RIAA welcomed yesterday's news.

"...it is long past time for China to come to grips with the fact that limitations on the access of American content companies to the Chinese market has not had any practical result other than effectively providing exclusive distribution channels for illegal music distributors rather than legitimate companies," the Chairman and CEO of the RIAA said.

"China's inaction is enormously costly to musicians, songwriters and record labels across the world. The irony is that China's failed piracy and market access strategies hurt Chinese creators most. We hope that today's announcement will trigger an immediate reform of Chinese policy and practices."

From the MPAA's Dan Glickman:

"This is a welcome and logical next step in efforts to spur progress in China. Fair market access and respect for the intellectual property of other countries are basic conditions of membership in the global community which China committed to live by when it sought acceptance into the WTO. This action is fair, timely and appropriate.

"I am optimistic about the potential for a favorable resolution, and the resulting benefits for the U.S. motion picture industry. The Chinese people - like people the world over - love American movies."

The Chinese response was not particularly favorable, saying the move could "seriously damage" the bilateral business relationship between the two countries. Trying to open up Chinese markets to American goods has never been easy. Whether the threat of an escalating trade dispute changes this historical fact remains to be seen.